Gold bubble will burst
Published: Tuesday, August 23, 2011
Updated: Tuesday, August 23, 2011 13:08
Businesses and shops that deal in gold have become commonplace across America. Pawn shops as well as new companies that buy and sell gold in mall shops have made gold speculation easily accessible to Americans
On Sept. 16, 2008 — the same day global investment bank Lehman Brothers Holdings Inc. collapsed at the beginning of the recession — the price of gold was $779 per ounce, according to kitco.com. As of Monday evening, gold prices reached $1,911.90, which is more than double the price at that time.
The debt crises in Europe, and the U.S. have been the backdrop for gold's rise, and the recent crashes in the stock market have scared investors further. In the current volatile period, investors who are seeking safe havens have been buying strong currencies like the Swiss franc and the Japanese yen and commodities like gold, silver and oil.
However, gold investing is also deceptively lucrative as fears of hyperinflation are overblown in the news, and the price growth of gold is unsustainable.
This is a worrying shadow of the behavior seen during the recent U.S. real estate bubble of the mid 2000s. People bought houses in expectation of higher prices and tried to sell those houses to people who thought prices would go even higher.
According to economists, this behavior is called speculation. It continues until no one will buy the asset anymore because it is overvalued, causing prices to fall and the person holding the asset to get burned by the market. Gold is in a price bubble that is due to burst.
Veteran investor Warren Buffet shares this dim view of gold, dismissing gold investing during an interview with CNBC last March.
"If you took all of the gold in the world, it would roughly make a cube 67 feet on a side," he said. "(That) cube of gold, it would be worth at today's market prices about $7 trillion. That's probably about a third of the value of all the stocks in the United States. So you could have a choice of owning a third of all the stocks in the United States or you could have a choice of owning that little block of gold."
What he means is investors gain no financial benefit from holding gold other than the opportunity to sell it. Furthermore, since the 1980s, U.S. stocks and bonds have outperformed gold by more than double.
Gold is a volatile commodity and its value only increases when fear and uncertainty in the global market increases. Given the Federal Reserve's Aug. 9 statement that the U.S. interest rate is expected to remain between 0 and .25 percent until 2013, there is good reason to believe that there will be more uncertainty and probably a short-term rise in gold prices.
Even with price increases, the increasing value of gold over the past three years is an outlying phenomenon that is temporary. According to kitco.com, gold lost more than 17 percent of its value in the two weeks following Lehman Brothers collapse in 2008. Sudden falls in gold prices have and do occur during times of economic uncertainty.